Report for National Post and Telecom
Agency (PTS)
Long-run incremental cost modelling
of mobile termination in Sweden
Draft conceptual approach paper for industry
14 September 2010
Ref: 13392-373
Contents
0
0.1
0.2
0.3
0.4
Introduction
Background to the process
Scope of conceptual discussion
Project and consultation timetable
Structure of this document
1
1
2
3
4
1
1.1
1.2
1.3
1.4
Conceptual issues related to the operator definition
Type of operator
Structural implementation
Network rollout
Scale of operator
5
5
6
7
9
2
2.1
2.2
Conceptual issues related to the modelled technology
Network architecture
Network nodes
13
13
18
3
3.1
3.2
Conceptual issues related to modelled services
Service set
Inclusion of non-network costs
20
20
21
4
4.1
4.2
4.3
4.4
4.5
Conceptual issues related to the implementation
Increments
Timeframe
Depreciation method
Weighted average cost of capital (WACC)
Mark-up mechanism
22
22
25
26
27
27
Annex A: Summary of recommendations
Annex B: Details of economic depreciation calculation
Annex C: Glossary
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Long-run incremental cost modelling of mobile termination in Sweden
Copyright © 2010. Analysys Mason Limited has produced the information contained herein
for the National Post and Telecom Agency (PTS). The ownership, use and disclosure of this
information are subject to the Commercial Terms contained in the contract between
Analysys Mason Limited and PTS.
Analysys Mason Limited
St Giles Court
24 Castle Street
Cambridge CB3 0AJ
UK
Tel: +44 (0)1223 460600
Fax: +44 (0)1223 460866
[email protected]
www.analysysmason.com
Registered in England No. 5177472
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Long-run incremental cost modelling of mobile termination in Sweden | 1
0 Introduction
The National Post and Telecom Agency (Post-och telestyrelsen, or ‘PTS’) has commissioned
Analysys Mason Limited (‘Analysys Mason’) to develop a long-run incremental cost (LRIC)
model for the purposes of understanding and regulating the cost of mobile voice termination in
Sweden. This wholesale service falls under the designation of Market 7, according to the European
Commission (EC) Recommendation on relevant markets.
Analysys Mason and PTS have agreed a draft process to deliver the LRIC model, which will be
used by PTS to inform its regulation for mobile termination. This process presents industry
participants with the opportunity to contribute at various points during the project. Proposed
modelling principles are presented throughout this paper for industry parties to comment on.
In the remainder of this section, we provide:



the background to the overall process
an explanation of the scope of this document
the structure of this paper.
0.1 Background to the process
In 2003, PTS developed a LRIC model of mobile networks in Sweden. This model was originally
intended to only capture GSM network deployments. In 2007/08, a major upgrade was undertaken
in order to capture the emergence of UMTS networks and services. The documentation describing
the development of this model (the ‘previous model’) can be found on the PTS website. 1 The latest
version (6.3) was finalised in June 2010.
In May 2009, the European Commission (EC) published a Recommendation2 on the costing of
termination services (‘the EC Recommendation’). The purpose of the EC document was to put
forward a recommended and harmonised approach to the costing of both fixed and mobile
termination services. The EC approach considers terminated voice traffic as the last service
(increment) in the service stack of a network, and recommends that common costs are not added to
the LRIC of termination, instead being recovered from other services. This leads to a definition of
a “pure” long-run incremental cost approach, where only the avoidable costs of termination are
considered to be recoverable by the termination service.
PTS has therefore commissioned Analysys Mason to develop a calculation of this “pure LRIC” of
mobile termination, for the purposes of modelling the costs of this wholesale service in accordance
with the EC Recommendation. PTS also intends to take account of the latest developments in
terms of modern, efficient mobile network operation in Sweden.
1
2
http://www.pts.se/sv/Bransch/Telefoni/SMP---Prisreglering/Kalkylarbete-mobilnat/Arkiv/
Commission Of The European Communities, COMMISSION RECOMMENDATION of 7.5.2009 on the Regulatory Treatment of Fixed
and Mobile Termination Rates in the EU, 7 May 2009.
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Long-run incremental cost modelling of mobile termination in Sweden | 2
0.2 Scope of conceptual discussion
The conceptual issues to be addressed throughout this document are classified in terms of four
dimensions: operator, technology, service and implementation, as shown in Figure 0.1.
Figure 0.1: Framework
Operator
for classifying conceptual
issues [Source: Analysys
Conceptual issues
Technology
Services
Mason]
Implementation
Operator
The characteristics of the operator used as the basis for the model represent
a conceptual decision with major costing implications:




Technology
The network to be modelled depends on the following conceptual choices:


Services
What technology and architecture should be deployed in the
modelled networks? This encompasses a wide range of technological
issues that aim to define the modern/efficient standards for delivering
voice termination, including topology and spectrum constraints.
What is the appropriate way to define the network nodes and their
functionality? When building network models in a bottom-up manner
using modern technology, it is necessary to determine which
functionality should exist at the various layers of network nodes. Two
options here include scorched-node or scorched-earth approach,
although more complex node adjustments may be undertaken.
Within the service dimension, we define the scope being examined:


Ref: 13392-373
What type of operator should be modelled – actual, average, or some
kind of hypothetical operator?
What structural implementation of the model should be applied?
Usually, this determines whether a top-down, bottom-up or hybrid
approach is more appropriate.
What is the rollout of the operator being modelled – is the modelled
operator required to provide national service (or at least to 99% of the
population), or some specified sub-national coverage?
What scale of operator should be modelled in terms of market share?
What service set does the modelled operator support?
Are costs calculated at the wholesale or retail level?
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Long-run incremental cost modelling of mobile termination in Sweden | 3
Implementation
A number of implementation issues must be defined to produce a final cost
model result. They are:




What increments should be costed?
What depreciation method should be applied to annual expenditures?
What is the weighted average cost of capital (WACC)?
What mark-up mechanism should be applied to costs that are
common to the increments?
PTS’s previous model takes a specific approach on each of these issues; the purpose of this
document is to set out the basis on which to develop the new LRIC model for PTS.
0.3 Project and consultation timetable
This paper presents the conceptual approach for the development of the new LRIC model for
mobile termination in Sweden. An overview of the anticipated project timeline is shown below.
Aug Sep Oct Nov Dec
Jan Feb Mar Apr May
Phase 1: Model conceptual specification
Phase 2: Conceptual consultation
Phase 3: Finalise conceptual approach
Phase 4: Data collection
Phase 5: Build draft model
Phase 6: Draft model consultation
Phase 7: Finalise model
Figure 0.2:
Project plan [Source: Analysys Mason]
Industry participants are invited to contribute to three phases of this project (illustrated by the red
boxes in Figure 0.2 above):

Conceptual consultation (Phase 2): this paper presents the draft approach to upgrading the
LRIC model. Industry stakeholders are asked to submit comments on the criteria during a
four-week consultation period.

Data collection (Phase 4): data requests will be released to industry by PTS in late October or
early November 2010. Information returned to us during the data collection process will be
treated as confidential under the terms of our contract with PTS. However, we will request
information from the operators in a form that will enable it to be used within the model
without breaching this commercial sensitivity.3 From our previous modelling work for PTS,
3
For example, we may receive multiple responses to each question and it is our intention to be able to average, round, parameterise,
standardise and/or process this operator information in order that it can be shared openly in a transparent cost model.
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Long-run incremental cost modelling of mobile termination in Sweden | 4
we understand the confidentiality and information sharing obligations placed upon the network
joint ventures, and therefore we anticipate that some information may need to be provided
separately by the joint ventures. All industry parties may contribute to this phase if they have
relevant data, by submitting information to PTS. By contributing data, industry parties can
play a role in the finalisation of the model. The data request will have two main sections: one
related to demand/network data and another related to cost data. Industry will have four weeks
to contribute data on the first section and a further four weeks to contribute data on the second
section i.e. eight weeks in total.

Draft model consultation (Phase 6): following development of the draft LRIC model based
on the data received, a draft model will be issued to industry for consultation. A period of six
weeks has been scheduled for this consultation phase. Following this consultation on the draft
model, operator comments will be reviewed and the model will then be finalised. An industry
workshop will be scheduled at the end of the model finalisation in order to describe the
outcomes of the project to industry, prior to PTS’s price-setting decisions.
0.4 Structure of this document
The remaining sections of this document provide a discussion of the conceptual issues, the
implications for costing and the recommended approach to each issue.




Section 1 discusses operator-related issues
Section 2 summarises technology-related issues
Section 3 deals with service-related issues
Section 4 explores implementation-related issues.
Recommendations are stated at the end of each section and also in Annex A. Operators should
refer to these recommendations when providing their responses to this consultation paper.
The paper also includes details of the proposed economic depreciation calculation in Annex B and
a glossary of acronyms used in Annex C.
For reference, an overview of the LRIC model structure is provided in Section 4.1.
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Long-run incremental cost modelling of mobile termination in Sweden | 5
1 Conceptual issues related to the operator definition




What type of operator should be modelled?
What structural implementation of the model should be applied?
What is the rollout of the modelled network?
What scale of operator should be modelled in terms of market share?
1.1 Type of operator
The type of operator to be designed in the model is the primary conceptual issue which determines
the subsequent structure and parameters of the model.
The original model developed in 2003 captured actual GSM operators. The principle of actual
operators was also observed in the 2007/08 upgrade, but had to reflect each operator’s mix of
ownership of GSM and UMTS networks. In particular, all four major mobile network operators
(MNOs) had part ownership of a UMTS network via joint venture (JV) agreements. The models of
these shared networks have required complex implementations. In addition, it has been difficult to
demonstrate reconciliation and the various JV network results transparently to the operators, due to
limitations on how much information from the models of the shared networks can be divulged to
the parents of the JVs.
Today, the organisation of the mobile networks is still changing in significant ways. New networks
are still being deployed e.g. the combined GSM/LTE network by a JV called Net4Mobility (N4M),
parented by Tele2 and Telenor. To continue to model actual networks would require greater
increases in both the complexity and restrictions in the distribution of model information. The
evolution of mobile network ownership in Sweden is illustrated in Figure 1.1.
Telenor
Tele2
Telenor
TeliaSonera
TeliaSonera
KEY
Figure 1.1:
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3GIS
SUNAB
Tele2
GSM network
Hi3G
UMTS network
2010 model, if actual operators
were to continue to be used
Tele2
N4M
N4M
TeliaSonera
Telenor
3GIS
2008 model upgrade using
actual operators
SUNAB
2003 model development using
actual operators
Hi3G
LTE network
Illustration of mobile network ownership in Sweden over time [Source: Analysys Mason]
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Long-run incremental cost modelling of mobile termination in Sweden | 6
If the model to be developed in this process continues to capture existing operators, then
constructing both long-term forecasts and incorporating any future changes in the LRIC model will
become increasingly complex.
We note that PTS’s current pricing approach determines a symmetric price of termination for all
network operators and MVNOs using a single result from the previous model. This result was
chosen as the highest cost for any of the modelled operators, blended across the networks to which
they either wholly or partially have ownership. A highest actual cost approach is no longer
consistent with the EC Recommendation (which requires the costs of an efficient-scale operator).
Given the symmetry of PTS’s pricing approach, a model of a single, efficient, mobile network
deployment could be set up to determine an appropriate cost of termination for the Swedish market,
which could then be applied directly. This deployment could use multiple technologies, as discussed in
Section 2.1, but may not exactly reflect the deployments or costs of any one actual operator.
A single, efficient model could achieve a higher level of transparency for all stakeholders in
Market 7, including all mobile network owners, MVNOs, fixed operators, etc. This is because it
would be possible to develop the single model so that no operator-specific information is included
within the model, making it suitable for full sharing. This approach has been used recently in other
countries, such as the Netherlands.4
A single, efficient operator approach would be supported by the EC Recommendation, which
advocates costing an efficient-scale operator - by implication, not an actual operator. However, the
precise characteristics of this type of operator are not defined within the EC Recommendation,
although some clear guidance is given. The primary characteristics of such a modelled operator
will be specified throughout the rest of this conceptual paper.
Draft Recommendation 1.1: A single mobile network and configuration will be modelled.
Actual operators will not be modelled. The intention will be to produce a model that is fully
and openly sharable with all stakeholders in Market 7.
1.2 Structural implementation
The original version of the previous LRIC model was a hybridised5 calculation of the three actual
GSM network operators in Sweden at the time (TeliaSonera, Telenor and Tele2). It considered
them all to be efficient by Swedish standards, and costs were assessed on the basis of each
operator’s actual size, plus a forecast of converging operator size. This model was then upgraded
in 2007/08 to consider the UMTS networks deployed in Sweden, leading to the modelling of seven
networks (three GSM and four UMTS). Reconciliation (“hybridisation”) of the bottom-up model
4
5
http://www.opta.nl/nl/actueel/alle-publicaties/publicatie/?id=3180
A bottom-up model that has been compared to, and adjusted using, top-down information or a top-down model.
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Long-run incremental cost modelling of mobile termination in Sweden | 7
was again undertaken with reference to operators’ and/or JVs’ GSM and UMTS network accounts.
In order to model both GSM and UMTS networks, two copies of the original model files were
used, increasing the size and complexity of the Microsoft Excel model implementation.
In order to produce a LRIC calculation for the modelled network that we recommend in
Section 1.1, we propose that a new model is constructed. Since the calculation will only include
one set of modelled networks, we anticipate that the model can be significantly smaller and
simpler than its predecessor. Our intention would be to implement the entire LRIC calculation in
one workbook, as we have done more recently for regulators in other jurisdictions.
Inputs and calculations from the previous model, related to both costs and network design, will be
reused where necessary in order to transfer the knowledge already captured within the previous
implementation. Inputs to the model will be anonymised where necessary in order to make the
model fully sharable, so that it does not contain commercially sensitive information. It will also be
ensured that the model will be compatible with all versions of Microsoft Excel from 2000 to 2010.
We believe it is appropriate that network calibration and cost reconciliation are still undertaken on
the bottom-up calculation in order to accurately reflect Swedish market conditions – the EC
recommends that this step can improve the robustness of model results. This can include using
asset capacities employed by actual Swedish operators, as well as unit costs paid by actual
operators. We expect that it may be possible, using a suitably constructed calculation and subject
to the availability of suitable operator information, to compare the total network and expenditures
of the modelled networks with those incurred by the Swedish MNOs.
Draft Recommendation 1.2: A new bottom-up LRIC model will be constructed in a single
Microsoft Excel workbook. Inputs and calculations from the previous model will be reused
where appropriate. Top-down validation of the bottom-up calculation will be undertaken as
far as possible and will be dependent on operator data availability.
1.3 Network rollout
This section will cover both the history of the modelled network rollout and its forecast development.
1.3.1 Historical development of rollout
One issue to consider in the modelled network is how the rollout evolves over time. In particular,
including history in the model would mean, for example, starting GSM in the early 1990s, rolling
out UMTS, upgrading switches and transmission, etc. Given the long time that GSM has been
established in the Swedish market, we now consider that such an approach would increase the
complexity of the model and divert focus from today’s efficient forward-looking network
standards. This is particularly important as the model will be used for price setting in the period
2011–13, approximately twenty years after the launch of GSM.
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Long-run incremental cost modelling of mobile termination in Sweden | 8
The latest actual operator and market information available during the modelling process will be
for the full-year 2010. It is anticipated that, similar to PTS’s recent Market 7 regulation update
processes, minor updates are to be applied in the model (e.g. demand) up to 2013, but it is
important for PTS’s longer-term price setting that the model reflects the situation that is expected
in three years’ time. Therefore we consider that 2010-2013 is the most important period of
modelling and propose that the start date of the network modelling is 2010.
Given a rollout from 2010, it must also be considered whether the modelled networks constitute a
new entrant to the market. Economic theory suggests a new entrant to the market would set a valid
constraint on the mobile termination rates of existing players. Such a new entrant would use latest
technology such as fibre transmission. However, there are currently no new entrants to the
Swedish mobile voice termination market and it is unlikely that there will be any significant ones
in the near future. Moreover, a real new entrant might develop slowly as it competes for
subscribers and would need full coverage or national roaming. There is also no actual top-down
data with which to validate a model of a new entrant operator.
Therefore, a forward-looking and efficient approach to the modelled networks is required in the
context of the actual Swedish operators. We note that these actual operators are currently moving
through a process of network renewal, such as N4M replacing the GSM networks of Tele2 and
Telenor. Other operators are developing new networks, e.g. TeliaSonera’s LTE network.
As such, for the purposes of setting the regulated price to apply to the actual players in the voice
termination market, it is reasonable to consider that the modelled operator is a pre-existing
operator with a share of the existing market (GSM, UMTS and HSPA traffic) and a pre-existing
(old) network. We consider that it is reasonable to model that the old network is being largely
renewed with, for example, a new radio layer, fibre transmission, an IP backbone, modern high
capacity BSC/RNC/MSS/MGW switches and with switch co-location (rationalisation) in main
switch buildings. In real networks (as in our proposed model), traffic is migrated onto this renewed
network as it is rolled out and activated stage/area by stage/area.
Draft Recommendation 1.3.1: The modelled operator will be assumed to be an existing
network operator deploying a new network active from 2010.
1.3.2 Forecast development of rollout
As discussed in Section 2.1, a combination of GSM, UMTS and LTE radio technologies are
proposed to be modelled. Since both UMTS and LTE use higher frequencies than GSM, the levels
of coverage that they can economically attain are likely to be smaller. The coverage profiles of all
technologies will be key inputs to the LRIC model. We propose that:



GSM is the most extensive network (using 900MHz frequencies), covering almost all
population (e.g. 99.9%)
UMTS is the next most extensive network, e.g. to 99% population
LTE is limited to urban areas (e.g. 50% population).
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Long-run incremental cost modelling of mobile termination in Sweden | 9
As in the previous model (and as in reality), the modelled GSM network would use 900MHz
frequencies for coverage with 1800MHz available for a capacity overlay. There will be
functionality in the model to separate urban and rural parts of the network explicitly.
In the previous model, the GSM network was shut down and all traffic was migrated onto the
UMTS network in the long term. We note that there are still new GSM deployments underway in
Sweden today, suggesting that (for some parties at least) GSM is still a modern equivalent asset for
the conveyance of mobile termination, especially in rural areas. Therefore we propose that the
GSM network in the model is not shut down.
Draft Recommendation 1.3.2: The modelled networks will be assumed to consist of a
national 900MHz GSM network to be active in 2010, supplemented with 1800MHz
frequencies if necessary for extra GSM capacity. Urban and rural networks will be
separable in the model. A 2100MHz overlay for UMTS voice and HSPA capacity upgrades
(reflecting technology currently available) will also be deployed to carry increased voice
traffic and (high-speed) mobile data traffic. An urban LTE network will also be modelled.
The parallel GSM and UMTS networks would be operated into the long term, and thus
complete migration off the modern GSM to the UMTS network will not be modelled.
1.4 Scale of operator
One of the main parameters that may influence the cost (per unit) of the modelled networks is its
market share. It is therefore important to determine the market share of the operator and the period
over which any market share evolution/growth takes place. Both issues are described below.
1.4.1 Market share of the operator
The parameters chosen for defining the operator’s market share over time influence the overall
level of economic costs calculated by the model. Any proposed market share will include the
subscribers registered to both service providers and mobile virtual network operators, since their
corresponding volumes contribute to the total market and the economies of scale within the host
network operations.
Regarding the scale of the modelled operator, the EC Recommendation suggests that a 20% market
share is the minimum efficient scale. However, the EC recognises that this may not be appropriate for
all member states. This means that the specific market share adopted should take into account the actual
operators present in the market. One approach would be that the scale of the modelled operator is
100%/N, where N is the actual number of large network operators having near-nationwide coverage in
the long run. There are currently four such MNOs in the Swedish market.
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Long-run incremental cost modelling of mobile termination in Sweden | 10
However, the situation in Sweden is more complicated since the networks owned (wholly or
partially) by the four MNOs differ in each case. This is implied in Figure 1.1 and is described in
more detail in Figure 1.2 below.
Operator
Established networks (networks under development)
Urban GSM
Rural GSM
Urban UMTS
Rural UMTS
TeliaSonera
Owned
Owned
Shared (SUNAB)
Shared (SUNAB)
Telenor
Owned (shared N4M)
Owned (shared N4M)
Owned
Shared (3GIS)
Tele2
Owned (shared N4M)
Owned (shared N4M)
Shared (SUNAB)
Shared (SUNAB)
Hi3G
None, national
roaming only
None, national
roaming only
Owned
Shared (3GIS)
Figure 1.2:
Summary of major GSM/UMTS networks in Sweden [Source: Analysys Mason]
Since the last model upgrade, Telenor and Tele2 have launched a JV called Net4Mobility (N4M),
which will see a shared GSM/LTE network being deployed. This GSM network will reportedly
replace the two existing GSM networks owned by these operators. This indicates that, in the long
term, there will be:




two urban GSM networks (TeliaSonera and N4M)
two rural GSM networks (TeliaSonera and N4M)
three urban UMTS networks (Telenor, Hi3G and SUNAB)
two rural UMTS networks (SUNAB and 3GIS).
In the previous LRIC model, a bottom-up calculation of the operator-by-operator demand volumes
was developed. We propose that in the new LRIC model, the first step is to use/construct a forecast
of the whole mobile market and then specify proportions of that traffic to be conveyed on the
modelled networks. For example, the outgoing voice on the modelled urban GSM network would
be determined as follows:




forecast outgoing voice across all Swedish networks, using the PTS market data
define a proportion of this traffic to be on urban networks
define a proportion of this traffic to be on the urban GSM networks
define a proportion of this traffic to be on the modelled urban GSM network: the long-term
implication of two urban GSM networks implies that this proportion would be 50%.
This calculation is illustrated below in Figure 1.3. The benefit of this approach is that there would
be no operator-specific data in the market demand calculation, meaning that no anonymisation
would be required prior to the model distribution.
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Long-run incremental cost modelling of mobile termination in Sweden | 11
Proportion of
outgoing voice on
urban networks
(time)
Proportion of
outgoing urban voice
on GSM networks
(time)
Proportion of
outgoing urban GSM
voice on modelled
network (time)
Total outgoing voice
minutes on urban
networks (time)
Total outgoing voice
minutes on urban
GSM networks (time)
Total outgoing voice
on modelled urban
GSM network (time)
Figure 1.3: Illustration
of top-down market
demand calculations
[Source: Analysys
Total outgoing voice
minutes (time)
Key
Input
Calculation
Mason]
Output
The first and second inputs could be informed by (averaged or processed) submitted operator data
regarding distribution of traffic across their networks, taking into account publicly available
underlying information such as the population distribution by post-sector. It would also be
necessary to define the urban/rural areas more precisely to determine the boundary between the
separate and shared networks. We would seek to update and improve our geographical analysis,
relying partly on operator-submitted information in order to achieve this.
Draft Recommendation 1.4.1: The starting point for the model will be a total market
forecast, based on public PTS data. Market shares for the modelled urban and rural
networks will be considered separately, with the modelled operator’s market share being
based on the long-run number of active networks in Sweden.
1.4.2 Time taken to achieve steady state
A further issue of scale is the time taken to achieve steady-state market share.
It will be necessary to specify in the model the rate at which the modern network is rolled out, and
the corresponding rate at which that modern network carries the volumes of the operator (up to the
1/N market share proposed above). There are a number of options:

Option 1: Immediate scale. In this option, the modelled operator immediately achieves its
100/N% market share when it starts supplying network services, and rolls out its network just
in time to serve this demand at launch. We note that this is equivalent to a full renewal of an
existing network.

Option 2: Assuming a hypothetical rollout and market share profile. In this option, a time
period to achieve coverage (footprint) rollout would be specified (e.g. three years) and a time
period to achieve full scale (100/N%) would also be specified (e.g. six years).

Option 3: Rollout and growth based on history. It is possible to apply rollout and volume
growth profiles which have been obtained directly from the average of the actual mobile
operators. This approach would require looking back at networks a long time ago to the early
1990s, though this data does potentially exist in the previous LRIC model.
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Long-run incremental cost modelling of mobile termination in Sweden | 12
At the current time, all three GSM operators in Sweden are operating mature GSM networks,
carrying their full GSM demand. Our proposed approach is modelling an operator with existing
infrastructure deploying a new modern network (See Draft Recommendation 1.1) and therefore we
do not consider Option 3 to be relevant. We consider that the choice of Option 1 or Option 2
depends on the rate at which the network is deployed in the model, and to a large extent should
have little impact on the cost results. Either the modelled networks are rolled out:


immediately in full to immediately support all traffic, or
over a specific period of time (minimally first, followed by capacity augmentation later), and it
takes a specific period of time to fill up the network with existing traffic.
Modelling immediately full networks in 2010 means that the model can be accurately compared to
today’s actual networks, which we consider will improve the robustness of the calculation.
We note that LTE networks are currently being deployed, but these appear to be an overlay for
increased data traffic conveyance.
Draft Recommendation 1.4.2: We propose to model the deployment of the network to
achieve immediate full scale for 2010, reflecting the actual full networks today.
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Long-run incremental cost modelling of mobile termination in Sweden | 13
2 Conceptual issues related to the modelled technology


What technology and network architecture should be deployed in the modelled network?
What is the appropriate way to define the network nodes and their functionality?
2.1 Network architecture
The mobile LRIC model requires a network design based on a specific choice of modern
technology. From the perspective of termination regulation, modern-equivalent technologies
should be reflected in these models: that is, proven and available technologies with the lowest cost
expected over their lifetimes. Mobile networks have been characterised by successive generations
of technology, with the two most significant steps being the transition from analogue to digital
GSM (2G), and an ongoing expansion to include UMTS (3G) related network elements and
services. Deployments of long-term evolution (LTE) technology also began in Sweden in 2009.
The mobile network architecture splits into three main parts: a radio network, a switching network
and a transmission network. In addition, the modelled networks require access to mobile spectrum
holdings in order to use the radio interfaces. We discuss each of these aspects in this section.
2.1.1 Radio network
There are four generations of radio technology standards that could be used, either in isolation or
in combination. These are analogue (NMT, or 1G), GSM (2G), UMTS (3G) and LTE (4G).
Analogue technology is certainly not a modern equivalent asset today in Sweden, since the last
analogue network was closed down in 2007. All operators have access to mature GSM networks
(either owned, new JV, or through national roaming) and to maturing UMTS networks (either
owned or JV). GSM and UMTS networks carry all of the mobile voice demand in Sweden and
there is no strong evidence that this will not be the case for the medium term. These networks also
carry the majority of mobile data traffic today, though PTS’s market information (and operator
data) in the short term may indicate the degree to which LTE is carrying mobile data Mbytes.
LTE is currently being deployed in Sweden by multiple operators and these networks will have
both active coverage and traffic by 2013. These networks are currently focused on delivering
higher-rate mobile data services using 2600MHz spectrum, which is less suitable for wide area or
widespread deployments. The large capacity available in modern mobile networks using 900MHz,
1800MHz and 2100MHz frequencies mean that a LTE deployment is unlikely to convey large
volumes of wholesale mobile voice termination in the short-to-medium term.
However, LTE networks are relevant to the LRIC model insofar as their assets can share costs with
other assets that are carrying significant volumes of termination traffic. For example, LTE base
Ref: 13392-373
.
Long-run incremental cost modelling of mobile termination in Sweden | 14
stations can share sites with equipment in GSM or UMTS networks, as well as share the backhaul
and core transmission networks. Therefore, although the impact of LTE on the pure LRIC of voice
may be limited, LTE nonetheless is a relevant technology to include in the model.
Since the intention of the model (according to Draft Recommendation 1.1) is to be fully open and
sharable, our modelling of LTE must not be over-reliant on operator information (unless network
design/cost information can be made available to us by the Swedish operators in a form which is
sufficiently non-confidential). Therefore, we would propose to approach the LTE part of the model
in a generic way, by applying our standard network design calculations and our own internal
estimates of unit costs. Some top-down reconciliation may be possible for 2010, but the model
may still be updated in future years as more demand or network/investment data becomes
(publicly or non-confidentially) available.
The LRIC modelling in any case includes GSM and UMTS radio technologies. Both of these
technologies are currently proven, available and carrying terminated volumes. UMTS is a more
recent (and higher capacity) technology that all Swedish operators are using, in particular to offer
mobile broadband services in parallel. It appears that those operators using GSM technology will
continue to do so in the coming years. In particular, Tele2 and Telenor have recently agreed to
build a new GSM network under a JV.
We therefore believe it is appropriate to also include both GSM and UMTS technologies in the
model as an efficient mechanism for delivering mobile services including wholesale termination
over the coming years. This is consistent with the EC Recommendation, which states that “the
bottom-up model for mobile networks should be based on a combination of GSM and UMTS
employed in the network […] reflecting the anticipated situation.”
Draft Recommendation 2.1.1: The mobile model will use both GSM and UMTS radio
technology in the long term, with GSM deployed in 900MHz and 1800MHz bands, and
UMTS deployed as a 2100MHz overlay. The model will also capture LTE radio technology
and in particular capture the sharing of GSM/UMTS assets with LTE radio equipment.
2.1.2 Radio spectrum holdings
We note that there is currently uncertainty surrounding spectrum holdings in Sweden. We consider
the four main blocks of spectrum currently owned by Swedish operators in turn: these are the
900MHz, 1800MHz, 2100MHz and 2600MHz bands.
900MHz band
The current owners of 900MHz spectrum have almost identical holdings. However, a revision of
these holdings has been proposed, as illustrated in Figure 2.1. The outcome of this proposal is
currently unknown.
Ref: 13392-373
.
Long-run incremental cost modelling of mobile termination in Sweden | 15
Operator
Current allocation
Proposed allocation
Figure 2.1: Current and
TeliaSonera
27.2MHz
210MHz
proposed allocations of
Telenor
27.2MHz
27.5MHz
900MHz spectrum
Tele2
27.2MHz
27.5MHz
[Source: PTS ]
Hi3G
20MHz
25MHz
N4M (implicitly)
214.4MHz
215MHz
6
As explained in Section 1.4.1, Teliasonera and N4M are the two national GSM networks expected
to exist in the long run. Since Teliasonera will have the minimum quantity of 900MHz spectrum
available for its national GSM network (in both the current and proposed allocations), we shall
assume the modelled network has access to this quantity. Our draft approach is therefore to assume
the modelled GSM network has access to 27.2MHz of 900MHz spectrum (the minimum amount
available to any of the GSM networks from either the current or proposed allocations).
1800MHz band
TeliaSonera, Telenor and Tele2 currently have 223MHz, 218.4MHz and 221MHz of
1800MHz spectrum respectively. Spring Mobil has a licence for 23MHz. Earlier this year,7 PTS
issued a decision stating that:



the 1800MHz licences allocated to TeliaSonera, Telenor and Tele2 will be automatically
renewed at the end of 2010 for seventeen years, but the new allocations will only be for
210MHz of spectrum for each operator
the licences allow use of both GSM and UMTS technologies
Spring Mobil will be assigned 25MHz (increased from 23MHz) until 2017, which is the
current expiry date for the licence. This licence will then not be automatically renewed.
PTS states in its decision its belief that these allocations are sufficient to continue to offer mobile
telephony over GSM. In particular, PTS believes that 210MHz is sufficient spectrum for the
capacity overlays of each of the three MNOs with national GSM networks. Hence, the modelled
GSM network will be assumed to have access to 210MHz of 1800MHz spectrum.
2100MHz band
Currently, the SUNAB JV between TeliaSonera and Tele2 has access to 215MHz of 2100MHz
spectrum. Telenor’s and Hi3G’s own urban UMTS networks also each have access to 215MHz.
The 3GIS JV has access to 230MHz of 2100MHz spectrum, via the licences of the two parent
companies (Telenor and Hi3G).
6
7
http://www.pts.se/sv/Dokument/Beslut/Spektrum/2009/Beslut-900-MHz-bandet---08-12019/.
http://www.pts.se/sv/Nyheter/Radio/2010/PTS-fornyar-tillstand-i-1800-MHz-bandet/.
Ref: 13392-373
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Long-run incremental cost modelling of mobile termination in Sweden | 16
The modelled UMTS network shall be assumed to have 215MHz of 2100MHz spectrum (the
minimum amount available to any of the actual UMTS networks).
2600MHz band
TeliaSonera, Telenor and Tele2 each have licences for 220MHz of spectrum, whilst Hi3G has a
licence for 210MHz. The N4M JV will have access to the spectrum owned by both Telenor and
Tele2 i.e. 240MHz in all. We note that the only other spectrum in this band is the 50MHz
unpaired spectrum allocated to Intel. In addition, we also note that the 2600MHz band is entirely
related to mobile broadband services and is unlikely to affect the LRIC of voice termination.
In the long run, it is possible that there will be three urban LTE networks deployed (N4M,
TeliaSonera and Hi3G), with access to 240MHz, 220MHz and 210MHz of spectrum
respectively. Our proposal is to conservatively assume that the modelled network has access to
210MHz of 2600MHz spectrum (the minimum of that available to the three LTE networks).
Draft Recommendation 2.1.2: The modelled networks will be assumed to have access to
27.2MHz of 900MHz spectrum, 210MHz of 1800MHz spectrum, 215MHz of
2100MHz spectrum and 210MHz of 2600MHz spectrum. Actual spectrum payments (if
any) associated with recent allocations will be applied on a per-MHz basis.
2.1.3 Switching network
The switching network for a combined GSM+UMTS radio network could either be:



two separate GSM and UMTS structures with separated transmission, each containing one or
more interlinked MSCs, GSNs and points of interconnect (PoI)
one upgraded legacy structure with a combined transmission network, containing one or more
interlinked MSCs, GSNs and points of interconnect (PoI) that are both GSM- and UMTScompatible
a combined GSM+UMTS switching structure with a next-generation IP transmission network,
linking pairs of media gateways (MGW) with one or more MSS, data routers and PoI,
separated into circuit-switched (CS) and packet-switched (PS) layers. Further modern
adaptations to this combined network are possible, e.g. all-IP transmission, flat architecture
with access gateways.
These three options are illustrated below in Figure 2.2. It should be noted that option (a) was used
in the previous mobile LRIC model.
Ref: 13392-373
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Long-run incremental cost modelling of mobile termination in Sweden | 17
(a) Separate switching
(b) Upgraded switching
Internet
Internet
GSM GSNs
(c) Combined IP switching
UMTS GSNs
Internet
Data routers
and GSNs
GSNs
MSS
UMTS
MSCs
GSM MSCs
BSC
BSC
GSM radio layer
Figure 2.2:
RNC
RNC
UMTS radio layer
MSS
GSM/UMTS
MSC
GSM/UMTS
MSC
MGW+
MGW
MGW+
MGW
BSC / RNC
BSC / RNC
BSC / RNC
BSC / RNC
UMTS radio layer
GSM radio layer
GSM radio layer
UMTS radio layer
Candidate core architectures for the mobile LRIC model [Source: Analysys Mason]
The EC Recommendation suggests that the switching network layer “could be assumed to be
NGN-based.” Mobile switching networks have been evolving for several years now (e.g. Release99, Release-4, etc.). The most recent deployments will use the latest technology, whilst older
deployments are likely to be currently upgrading their networks across these release versions.
Consequently, the mobile switching network that is modelled should be closely related to the
timeframe of the modelled networks. Since the modelled networks are assumed to commence
providing services in 2010, option (c) is appropriate, since this is available today and indeed used
by many operators in Western Europe.
This infrastructure can also convey traffic from the LTE network, although only mobile broadband
data traffic, and such traffic is switched by the LTE RNC (or tunnels past it) to the IP data
network. As a result, a proportion of the switching network costs may be allocated to LTE traffic.
Draft Recommendation 2.1.3: We shall model an MSS+MGW-layered core architecture,
which will be assumed to carry GSM, UMTS and LTE traffic. Today’s modern aspects of
the GSM+UMTS+LTE switching networks in Sweden will be implemented in the model.
2.1.4 Transmission network
Connectivity between mobile network nodes falls into a number of types:




base station last-mile access to a hub
hub to BSC or RNC
BSC or RNC to main switching sites (containing MSC or MGW) if not co-sited
between main switching sites (between MSC or MGW).
Ref: 13392-373
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Long-run incremental cost modelling of mobile termination in Sweden | 18
Typical solutions for providing transmission include:



leased lines (E1, STM1 and higher, 100Mbit/s and higher)
self-provided microwave links (2-4-8-16-32, STM1 microwave links, Ethernet microwave)
leased fibre network (leased/IRU dark fibre with either STM or Gbit fibre modems).
An operator today would most likely adopt a scalable and future-proof Ethernet-based
transmission network, although the supply of this network may depend on the prevailing
preferences of the operator.
In the radio network, it is our expectation that RNCs and MGWs will increasingly be sited in the
main switching nodes, i.e. that there will no longer be remote BSCs or RNCs (these will be
replaced by transmission hubs). This means that a modern backhaul network is likely to be:

Metropolitan fibre rings in the urban areas connecting the major radio sites back to the nearest
city-based switching site, combined with some leased lines to connect other sites into the fibre
rings or to the switching site.

Fibre, microwave and/or leased connections using a specific geographical set of rings and/or
trees to connect the sites in rural southern Sweden, up the Baltic seaboard, and into the remote
valleys of northern Sweden.
The choice of option (c) in Figure 2.2 for the switching network implies a national fibre backbone
network for carrying traffic via the switching sites, which would be located in the main southern
cities of Sweden. Modern MSS/MGW switches would typically be based on Gbit/s IP interfaces.
Draft Recommendation 2.1.4: We shall model a set of urban fibre/leased rings and links,
specific geographical rings/trees for rural sites, and a national fibre backbone network. It is
anticipated that the backbone network will use all IP transmission for voice and data, based
on Gbit/s links. Further details of the actual transmission networks in Sweden (where
modern and efficient) will be taken into account if submitted by the mobile operators.
2.2 Network nodes
Mobile networks can be considered as a set of nodes (with different functions) and links between
them. In developing network design algorithms for the model, it is necessary to consider whether
the algorithm accurately reflects actual node deployments in Sweden. Aside from modelling the
actual networks themselves, there are three approaches to capturing node deployments:
Scorched-node
approach
Ref: 13392-373
This assumes that the historical locations of the actual network
nodes/buildings are fixed, and that the modelled network can choose the
best technology to configure the network at and in between these nodes to
meet the optimised demand of an efficient network. For example, this could
mean the replacement of legacy equipment with best-in-service equipment.
.
Long-run incremental cost modelling of mobile termination in Sweden | 19
The scorched-node approach, therefore, determines the efficient cost of a
network that provides the same services as the incumbent network, taking as
given the current location and function of the incumbent’s nodes.
Modified scorchednode approach
The scorched-node principle can be reasonably modified in order to
replicate a more efficient network topology than is currently in place.
Consequently, this approach takes the existing topology and eliminates
inefficiencies with respect to modern standards. In particular, using this
principle can mean:


Scorched-earth
approach
simplifying the switching hierarchy e.g. reducing the number of nodes,
or replacing several small switches with one modern switch
changing the functionality of a node.
The scorched-earth approach determines the efficient cost of a network that
provides the same services as actual networks, without placing any
constraints on its network configuration, such as the location of the network
nodes. This approach models what an entrant would build if no network
existed, based on a known location of customers and forecasts of demand
for services. This approach would give the lowest estimate of cost, because it
removes all inefficiencies due to the historical development of the network, and
assumes that the network can be perfectly redesigned to meet current criteria.
The previous mobile LRIC model assumed a scorched-node approach, whereby the efficient cost of a
network was determined to provide the same services as the actual network, reflecting the current
number and function of the actual nodes. Since we propose to model an efficient network configuration
in the new LRIC model, we will consider how actual nodes (number, location and function) may be
reflected or adjusted in the efficient network deployment. The modified scorched-node approach is
more appropriate in the approach in the new LRIC model, where functionality in the nodes can be
modified in order to arrive at a more reasonably efficient outcome for 2010 onwards. For example:



remote BSCs could be moved to main switching sites, with the BSC site downgraded to a
transmission hub or even just a radio site
radio sites could be interchanged between macro, micro and pico sites (though we do not plan
to undertake our own radio network re-optimisation in the absence of clear information from
industry parties)
switching sites could be restricted to the main cities, with any rural sites reduced to hubs.
Draft Recommendation 2.2: The LRIC model will adopt the modified scorched-node
principle. This means that the actual number of nodes in the real operators’ networks
(subject to differences in coverage, market share, capacity, etc.) will be reflected, but the
function of the node may be “scorched” if the actual deployments do not reflect reasonably
efficient criteria for 2010 and onwards.
Ref: 13392-373
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Long-run incremental cost modelling of mobile termination in Sweden | 20
3 Conceptual issues related to modelled services
This section discusses the following issues:


What service set do the modelled networks support?
Are non-network costs relevant for inclusion in the model?
3.1 Service set
Economies of scope, arising from the provision of both voice and data services across a single
network, will result in a lower unit cost for voice and data services. This is particularly true for
networks built on next-generation architectures, where voice and data services may be delivered
via a single platform.
As a result, a full list of services must be included within the model, as a proportion of network
costs will need to be allocated to these services. This also implies that both end-user and wholesale
voice services will need to be modelled so that the voice platform is correctly dimensioned and
costs are fully recovered from the applicable traffic volumes.
Some of the non-voice services are proven services, such as SMS. Other non-voice services, such
as mobile broadband, can give rise to forecast uncertainty when included in the modelling of the
cost of voice using a LRAIC approach. However, in the case of the pure LRIC approach, where
terminated voice traffic is treated as the last service in the network, the impact on voice of any
uncertainty surrounding these services will be much lower. Nonetheless, the model will be able to
apply sensitivity tests to the demand forecasts.
An initial list of services is given below in Figure 3.1.
Service to be costed
Figure 3.1:Initial list
Voice subscribers to the network
of services for the
Mobile broadband subscribers to the network
model [Source:
Incoming minutes to GSM subscriber, from OLOs
Analysys Mason]
Incoming minutes to UMTS subscriber, from OLOs
GSM on-net minutes
UMTS on-net minutes
Outgoing minutes from GSM subscriber, to OLOs
Outgoing minutes from UMTS subscriber, to OLOs
GSM SMS messages
UMTS SMS messages
MMS messages
GPRS data megabytes
EDGE data megabytes
HSPA data megabytes
LTE data megabytes
Ref: 13392-373
.
Long-run incremental cost modelling of mobile termination in Sweden | 21
We propose that LTE data will be included in the market model, as part of a forecast of total
mobile data megabytes. An estimated proportion of these mobile data megabytes will then be
modelled as being conveyed by the GSM networks (as GPRS/EDGE traffic), UMTS networks (as
R99/HSPA traffic) or LTE networks.
Draft Recommendation 3.1: Apply subscribers, voice, SMS and various data services to
the modelled networks. A total mobile data megabyte forecast will be implemented in the
market model. Proportions of this traffic will then be assumed to be carried as GPRS/EDGE
on GSM, as R99 on UMTS and as HSPA on UMTS, with the remainder assumed to be
conveyed by LTE.
3.2 Inclusion of non-network costs
PTS’s market definition for mobile termination is that of the wholesale market – by definition,
excluding retail costs.
Since the pure LRIC approach excludes all non-incremental costs of termination traffic by
definition, retail costs do not need to be modelled. A LRAIC approach also does not require
explicit modelling of non-network costs, since the approach in the previous mobile LRIC model
can still be applied i.e. that business overheads are assumed to be split 50:50 between the network
and retail parts of the business.
Draft Recommendation 3.2: Retail costs will not be modelled. Business overheads will be
modelled as a % mark-up in the LRAIC approach, with the percentage to be derived from
operator information.
Ref: 13392-373
.
Long-run incremental cost modelling of mobile termination in Sweden | 22
4 Conceptual issues related to the implementation
This section discusses the following issues:





What increments should be costed?
Over what timeframe does the model calculate network deployments?
What depreciation method should be applied to annual expenditures?
What is the weighted average cost of capital (WACC) for the modelled networks?
What mark-up mechanism should be applied to costs that are common to the increments?
4.1 Increments
The long-run incremental cost (LRIC) of an ‘increment’ of demand is the difference in the total longrun cost of a network which provides all service demand including the increment, and a network which
provides all service demand except the demand of the specified increment. Below we describe the two
main approaches to increments in mobile LRIC modelling and then set out our proposed position. We
finally outline how both approaches can be implemented within a single LRIC model.
Increment approaches
Historically, a large, marked-up average increment of all traffic has been used in mobile
termination service costing. The EC Recommendation now considers the definition of the pure
increment as the preferred approach. Both of these cost approaches are illustrated below in
Figure 4.1. Shaded boxes denote costs that are included in the cost per minute.
Increment used with LRAIC+ approach
Increment used in pure LRIC approach
Incremental cost of
voice termination
Subscriber
SIM
Figure 4.1:
Ref: 13392-373
Incremental cost of
all traffic
Subscriber
SIM
(MSCs, BSCs, radio sites etc.)
Large parts of mobile coverage
network, plus traffic related costs
for other services
Network common costs
Network common costs
(some coverage, spectrum)
(some coverage, spectrum)
Network share of business overheads
Network share of business overheads
Illustration of the LRAIC+ and pure LRIC approaches [Source: Analysys Mason]
.
Long-run incremental cost modelling of mobile termination in Sweden | 23
Long-run average incremental costing (LRAIC or LRAIC+) is typically consistent with previous
‘average’ incremental costing applied in mobile regulation Europe-wide. It can be described as a
large increment approach – all services which contribute to the traffic economies of scale in the
network are added together in a large increment and treated together. A second increment to capture
subscription (i.e. connection) sensitive costs can also be applied to the model. Calculating the
incremental (avoidable) cost of all traffic, and separately the incremental cost of all subscriptions,
means that some non-incremental costs may remain (an assessment of (parts of) the common
coverage network, and business overheads), which would be marked up as the ‘+’ in LRAIC+.
Individual service costs are identified by sharing out the large average (traffic) incremental cost
according to average resource consumption routeing factors. The adoption of a large increment in the
form of aggregate “traffic” means that all the traffic services that are supplied are treated together
and equally. Where one of those services may be regulated, the regulated service benefits from the
average economies of scale rather than either greater or lower economies.
Pure long-run incremental costing (pure LRIC) is consistent with the EC Recommendation, which
considers the increment to be all traffic associated with a single service, in this case wholesale
voice termination. Based on the avoidable cost principle, the incremental costs are defined as the
costs avoided when not offering the service. By building a bottom-up cost model containing
network design algorithms, it is possible to use the model to calculate this incremental cost by
running the model with and without the increment, and thus determine the cost increment. The unit
costs of voice termination is then determined by dividing that cost increment by the service
volume. This is summarised below in Figure 4.2.
Expenditures with
voice termination
(asset, time)
Difference in
expenditures
(asset, time)
Run model with
all traffic
Capex and opex
cost trends (asset,
time)
Voice termination
traffic minutes
(time)
Output profile with
voice termination
(asset, time)
Run model with
all traffic except
termination
increment
volume
Figure 4.2:
8
Economic cost of
difference in
expenditures
(asset, time)
Expenditures
without voice
termination (asset,
time)
Total economic
cost of the
difference in
expenditures (time)
Difference in output
(asset, time)
Output profile
without voice
termination (asset,
time)
Key
Input
Calculation
Output
Calculation of termination costs using a pure LRIC approach8 [Source: Analysys Mason]
The annotation (asset, time) indicates that the numerical calculation is carried out over all assets and over all time.
Ref: 13392-373
“Pure LRIC” per
minute (time)
.
Long-run incremental cost modelling of mobile termination in Sweden | 24
The EC proposes that common costs are not marked up onto the LRIC of wholesale voice
termination i.e. the result which would be relevant for PTS in this case would be the pure
incremental cost.
Proposed approaches
The pure LRIC method is consistent with the recent EC Recommendation, which specifies the
following approach for calculating incremental costs of wholesale mobile termination:

The relevant increment is the wholesale termination service, which includes only avoidable
costs. Its costs are determined by calculating the difference between total long-run costs of an
operator providing full services and total long-run costs of an operator providing full services
except voice termination.

Non-traffic related costs, such as subscriber-related costs, should be disregarded.

Costs that are common such as network common costs and business overheads, should not be
allocated to the wholesale terminating increment.
A LRAIC+ approach consistent with that implemented in previous mobile LRIC models in
Sweden (a large increment of all traffic, and a large increment of all subscriptions, including
mark-ups for common costs).
It is also necessary to specify the subscriber increment to capture costs that vary with the volume
of subscribers (i.e. without any change to the volume of traffic). This increment contains the SIM
card provided to subscribers and the HLR/VLR which registers subscriber identities and locations
irrespective of their calling behaviour. These platforms enable subscribers to send/receive traffic at
the air interface, with location update (LU) registrations for the users as they move around
Sweden. This increment excludes all forms of handsets and user equipment.
The EC Recommendation requires the adoption of the pure LRIC approach. However, we propose
to also implement a LRAIC+ approach as previously used in the model, allowing comparison of
results between the two increment methods, and with the previous model.
Draft Recommendation 4.1: In order to allow PTS to understand the cost implications of
LRAIC+ and pure LRIC approaches, both will be implemented in the model. The LRIC
method is recommended by the EC as the basis for setting mobile termination regulation.
Relation of approaches to the model structure
It should be emphasised that two increment approaches do not imply that two LRIC models will
be produced for industry. Instead, the new LRIC model will be one network cost model, which
determines the assets and capex/opex requirements for the input network traffic and design rules.
Ref: 13392-373
.
Long-run incremental cost modelling of mobile termination in Sweden | 25
Two separate LRIC calculations will then be applied to this single model, one for each proposed
increment. This is illustrated below in Figure 4.3.
New LRIC model for mobile termination in Sweden
Network design
inputs
(e.g. technologies,
coverage)
Traffic inputs
(e.g. volumes
carried by service,
busy hour
characteristics)
Cost inputs
(e.g. unit capex,
unit opex, cost
trends, asset
lifetimes)
Figure 4.3:
Network cost
model:
Schedules of asset
volumes, total
service output, total
capex, total opex
Run network
cost model with
all traffic
LRAIC calculation
(as in the previous
model)
Run network
cost model with
all traffic except
termination
increment
volume
Pure LRIC calculation
(calculate difference in
the two cases, as in the
EC Recommendation)
Relationship between the network design calculations and the LRIC calculations within the
new LRIC model [Source: Analysys Mason]
In particular, the outputs of the network cost model when run with all traffic will be used for both
the LRAIC calculation and the pure LRIC calculation. The network cost model must also be run
without terminated traffic in order to have all the necessary information available for the pure
LRIC calculation, which requires a difference in two total cost results to be calculated.
4.2
Timeframe
The period of years across which demand and asset volumes are calculated in the model, is a
necessary (explicit or implicit) input to the calculation. A long time series:



allows the consideration of all costs over time, providing the greatest clarity within the model
as to the implications of adopting economic depreciation
provides greater clarity as to the recovery of costs incurred from the services
provides a wider range of information with which to understand how the costs of the modelled
networks vary over time and in response to changes in demand or network evolution.
The time series should be equal to the lifetime of the operator, allowing full cost recovery over the
entire lifetime of the business. However, the lifetime of an operator is impractical to identify. We
would propose that the time series should be at least as long as the longest asset lifetime used in
the model.
Ref: 13392-373
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Long-run incremental cost modelling of mobile termination in Sweden | 26
The previous model used a network lifetime of 50 years, although steady state was assumed for the
final ten years. As discussed in Section 1.2, we propose that the modelled network is deployed
from 2010. Therefore, we propose a timeframe of calculation to be 2010–60, which is consistent
with the timeframe used in the previous LRIC model. This approach ensures that there is no need
to consider terminal values in the resulting costs.
Draft Recommendation 4.2: The timeframe of the model cost calculation will be 2010–60,
however, we expect to include a long steady-state period beyond 2015/2020 in order to
calculate costs without the need for a terminal value calculation.
4.3 Depreciation method
The model for network services will produce the relevant plan of network capital and operating
expenditures. These expenditures must be recovered over time, ensuring the operator can also earn
a return on investment. PTS’ fixed LRIC model currently employs tilted annuities to annualise
costs, whilst PTS’ mobile LRIC model currently uses an implementation of economic depreciation
that considers each asset group in a full-time series depreciation calculation.
Economic depreciation is the recommended approach for regulatory costing. In particular, it is the
approach preferred in the EC Recommendation. Previous mobile LRIC models in Sweden have
also employed economic depreciation and therefore we recommend that an economic depreciation
method continues to be employed.
However, the implementation in the previous model was complex, using an Excel worksheet to derive
the cost recovery profile for each modelled asset over time. Analysys Mason has developed an
alternative (simpler) implementation of economic depreciation that can complete the calculation for all
assets in one Excel worksheet. We believe that it would be beneficial to use this alternative
implementation, since it would considerably simplify the LRIC model. This implementation has been
used successfully in a number of other jurisdictions, including Denmark, Norway and the Netherlands.
The approach does not involve any different underlying principles, produces quite similar results, and
aims to determine the cost recovery path which the operator would follow in order to reflect:


the price trend of assets over time
the output from the network over time.
As required for any economic depreciation calculation, this method determines a cost recovery that is
economically rational, by reflecting both underlying production costs through modern equivalent
asset (MEA) price trends and lifetimes and the output of network assets over the long run.
The implementation of economic depreciation that we propose to use in the LRIC model is based
on the principle that all (efficiently) incurred costs should be fully recovered, in an economically
rational way. Full recovery of all (efficiently) incurred costs is ensured by checking that the PV of
actual expenditures incurred equals the PV of economic costs recovered, or alternatively, that the
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Long-run incremental cost modelling of mobile termination in Sweden | 27
net PV of cost recovery minus expenditures is zero. An allowance for capital return earned over
time, specified by the WACC, is also included in the resulting costs.
Draft Recommendation 4.3: The model shall include an economic depreciation calculation
of expenditures, according to the method set out in Annex B.
4.4 Weighted average cost of capital (WACC)
Mobile costing projects in Sweden have historically used the capital asset pricing model to derive
the nominal, pre-tax weighted-average cost of capital (WACC). The value to be used within this
process may be considered separately by PTS and therefore falls outside of the scope of this
document. If the WACC is not updated, then the nominal, pre-tax value (12.9%) will be retained.
Draft Recommendation 4.4: If PTS sees a requirement to update the nominal, pre-tax
WACC from its current value of 12.9%, then this will be undertaken in a parallel process.
Otherwise, the WACC used in the previous model will be retained.
4.5 Mark-up mechanism
Non-incremental costs may be included in the final cost of termination, according to the different
increment definitions discussed in Section 4.1. These can include traffic common costs i.e. parts of
the network common to all network services (e.g. the mobile licence fee). In addition, there are
also non-network common costs, or ‘business overheads’, common to all functions of the business
(e.g. the CEO).
The EC Recommendation specifically excludes the recovery of common costs from voice
termination. However, (part of) the common costs have usually been included in the cost boundary
in the past (i.e. in the LRAIC+ approach). The model will therefore include the option to recover
common costs as the LRAIC+ of the mobile termination service.
An equi-proportional mark-up (EPMU) mechanism has been used in previous mobile LRIC
models constructed for PTS. EPMU is supported by regulators and practitioners on the grounds
that it is objective and easy to implement. It is also consistent with regulatory practice elsewhere.
The ERG also believes that Ramsey pricing is practically infeasible due to the complex and
dynamic information requirements regarding demand elasticities.9
Draft Recommendation 4.5: For any allocation of common costs, an EPMU mechanism
will be used.
9
ERG COMMON POSITION: Guidelines for implementing the Commission Recommendation C (2005) 3480 on Accounting
Separation & Cost Accounting Systems under the regulatory framework for electronic communications, page 23.
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Long-run incremental cost modelling of mobile termination in Sweden | A-1
Annex A: Summary of recommendations
This annex summarises the draft recommendations set out within this paper and how they fit
within the framework set out in Figure 0.1.
1 Operator
1.1 Type of operator: A single mobile network and configuration will be modelled. Actual
operators will not be modelled. The intention will be to produce a model that is fully and
openly sharable with all stakeholders in Market 7.
1.2 Structural implementation: A new bottom-up LRIC model will be constructed in a single
Microsoft Excel workbook. Inputs and calculations from the previous model will be reused
where appropriate. Top-down validation of the bottom-up calculation will be undertaken as far
as possible and will be dependent on operator data availability.
1.3 Network rollout
1.3.1 Historical development of rollout: The modelled operator will be assumed to be an
existing network operator deploying a new network active from 2010.
1.3.2 Forecast development of rollout: The modelled networks will be assumed to consist of
a national 900MHz GSM network to be active in 2010, supplemented with 1800MHz
frequencies if necessary for extra GSM capacity. Urban and rural networks will be separable in
the model. A 2100MHz overlay for UMTS voice and HSPA capacity upgrades (reflecting
technology currently available) will also be deployed to carry increased voice traffic and (highspeed) mobile data traffic. An urban LTE network will also be modelled. The parallel GSM
and UMTS networks would be operated into the long term, and thus complete migration off
the modern GSM to the UMTS network will not be modelled.
1.4 Scale of operator
1.4.1 Market share of the operator: The starting point for the model will be a total
market forecast, based on public PTS data. Market shares for the modelled urban and rural
networks will be considered separately, with the modelled operator’s market share being
based on the long-run number of active networks in Sweden.
1.4.2 Time taken to achieve steady state: We propose to model the deployment of the
network to achieve immediate full scale for 2010, reflecting the actual full networks today.
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2 Technology
2.1 Network architecture
2.1.1 Radio network: The mobile model will use both GSM and UMTS radio technology
in the long term, with GSM deployed in 900MHz and 1800MHz bands, and UMTS
deployed as a 2100MHz overlay. The model will also capture LTE radio technology and in
particular capture the sharing of GSM/UMTS assets with LTE radio equipment.
2.1.2 Radio spectrum holdings: The modelled networks will be assumed to have access
to 27.2MHz of 900MHz spectrum, 210MHz of 1800MHz spectrum, 215MHz of
2100MHz spectrum and 210MHz of 2600MHz spectrum.
2.1.3 Switching network: We shall model an MSS+MGW-layered core architecture,
which will be assumed to carry GSM, UMTS and LTE traffic. Today’s modern aspects of
the GSM+UMTS+LTE switching networks in Sweden will be implemented in the model.
2.1.4 Transmission network: We shall model a set of urban fibre/leased rings and links,
specific geographical rings/trees for rural sites, and a national fibre backbone network. It is
anticipated that the backbone network will use all IP transmission for voice and data, based on
Gbit/s links. Further details of the actual transmission networks in Sweden (where modern and
efficient) will be taken into account if submitted by the mobile operators.
2.2 Network nodes: The LRIC model will adopt the modified scorched-node principle. This means
that the actual number of nodes in the real operators’ networks (subject to differences in coverage,
market share, capacity, etc.) will be reflected, but the function of the node may be “scorched” if the
actual deployments do not reflect reasonably efficient criteria for 2010 and onwards.
3 Services
3.1 Service set: Apply subscribers, voice, SMS and various data services to the modelled
networks. A total mobile data megabyte forecast will be implemented in the market model.
Proportions of this traffic will then be assumed to be carried as GPRS/EDGE on GSM, as R99
on UMTS and as HSPA on UMTS, with the remainder assumed to be conveyed by LTE.
3.2 Inclusion of non-network costs: Retail costs will not be modelled. Business overheads
will be modelled as a % mark-up in the LRAIC approach, with the percentage to be derived
from operator information.
4 Implementation
4.1 Increments: In order to allow PTS to understand the cost implications of LRAIC+ and pure
LRIC approaches, both will be implemented in the model. The LRIC method is recommended
by the EC as the basis for setting mobile termination regulation.
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4.2 Timeframe: The timeframe of the model cost calculation will be 2010–60, however, we
expect to include a long steady-state period beyond 2015/2020 in order to calculate costs
without the need for a terminal value calculation.
4.3 Depreciation method: The model shall include an economic depreciation calculation of
expenditures, according to the method set out in Annex B.
4.4 Weighted average cost of capital (WACC): If PTS sees a requirement to update the
nominal, pre-tax WACC from its current value of 12.9%, then this will be undertaken in a
parallel process. Otherwise, the WACC used in the previous model will be retained.
4.5 Mark-up mechanism: For any allocation of common costs, an EPMU mechanism will be used.
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Annex B: Details of economic depreciation calculation
An economic depreciation algorithm recovers all efficiently incurred costs in an economically
rational way by ensuring that the total of the revenues10 generated across the lifetime of the
business are equal to the efficiently incurred costs, including cost of capital, in present value terms.
This calculation is carried out for each individual asset class, rather than in aggregate. Therefore,
asset-class specific price trends and element outputs are reflected in the components of total cost.
Present value calculation
The calculation of the cost recovered through revenues generated needs to reflect the value
associated with the opportunity cost of deferring expenditure or revenue to a later period. This is
accounted for by the application of a discount factor on future cashflow, which is equal to the
WACC of the modelled operator.
The business is assumed to be operating in perpetuity, and investment decisions are made on this
basis. This means that it is not necessary to recover specific investments within a particular time
horizon (for example, the lifetime of a particular asset), but rather throughout the lifetime of the
business. In the model, this situation is approximated by explicitly modelling a period of 50 years.
At the discount rate applied, the present value of the SEK in the last year of the model is fractional
and thus any perpetuity value beyond 50 years is regarded as immaterial to the final result.
Cost recovery profile
The NPV=zero constraint on cost recovery can be satisfied by (an infinite) number of possible cost
recovery trends. However, it would be impractical and undesirable from a regulatory pricing
perspective to choose an arbitrary or highly fluctuating recovery profile. 11 Therefore, the costs
incurred over the lifetime of the network are recovered using a cost recovery path that is in line
with revenues generated by the business. In a contestable market, the revenue that can be
generated is a function of the lowest prevailing cost of supporting that unit of demand, thus the
price will change in accordance with the costs of the modern equivalent asset (MEA) for providing
the service. 12 The shape of the revenue line (or cost recovery profile) for each asset class is
therefore modelled as a product of the demand supported (or output) of the asset and the MEA
price trend for that asset class.
10
11
Strictly cost-oriented revenues, rather than actual received revenues.
For example, because it would be difficult to send efficient pricing signals to interconnecting operators and their consumers with an
irrational (but NPV=0) recovery profile.
12
In a competitive and contestable market, if incumbents were to charge a price in excess of that which reflected the modern
equivalent asset prices for supplying the same service, then competing entry would occur and demand would migrate to the entrant
which offered the cost-oriented price.
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Capex and opex
The efficient expenditure of the operator comprises all the operator’s efficient cash outflows over the
lifetime of the business, meaning that capex and opex are not differentiated for the purposes of cost
recovery. As stated previously, the model considers costs incurred across the lifetime of the business to
be recovered by revenues across the lifetime of the business. Applying this principle to the treatment of
capex and opex leads to the conclusion that they should both be treated in the same way since they both
contribute to supporting the revenues generated across the lifetime of the operator.
Details of implementation
The present value (PV) of the total expenditures is the amount which must be recovered by
the revenue stream. The discounting of revenues in each future year reflects the fact that
delaying cost recovery from one year to the next accumulates a further year of cost of capital
employed. This leads to the fundamental of the economic depreciation calculation that is:
PV (expenditures) = PV (revenues)
The revenues which the operator earns from the service in order to recover its expenditures
plus the cost of capital employed is modelled as a function of Output  MEA price trend.
Output is discounted because it reflects the (future) revenue stream from the network
element. Any revenues recovered in the years after a network element is purchased must be
discounted by an amount equal to the WACC in order that the cost of capital employed in
the network element is also returned to the mobile operator.


output is the service volume carried by the network element
MEA price trend is the input price trend for the network element which thus
proportionally determines the trend of the “revenue” that recovers the expenditures
(effectively, the percentage change to the revenue tariff that would be charged to each
unit of output over time).
This leads to the following general equations:
Revenues = α (output  MEA price trend)
Revenues = constant  output  MEA price trend
Using the relationship from the previous section:
PV (expenditures) = PV (constant  output  MEA price trend)
More specifically, since:
PV (expenditures) = PV (constant  output  MEA price trend)
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then the constant is just a scalar which can be removed from the PV as follows:
PV (expenditures) = constant  PV (output  MEA price trend)
Rearranging:
constant = PV (expenditures) / PV (output  MEA price index)
This constant is thus the unit price in the first year, and the yearly access price over time is
simply:
yearly access price over time = constant  MEA price index
This yearly access price over time is calculated separately for the capital and operating
components in one step in the model.
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Long-run incremental cost modelling of mobile termination in Sweden | C-1
Annex C: Glossary
2G
3G
BSC
BTS
CAPM
CS
E1
EPMU
FDD
GGSN
GPRS
GSM
GSN
HLR
HSPA
IRU
LRAIC
LRIC
LTE
LU
MEA
MGW
MSC
MSS
MVNO
NMT
OLO
POI
PS
R99
RNC
SGSN
SIM
SMS
STM
TDD
UMTS
VLR
WACC
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Second generation mobile telephony
Third generation mobile telephony
Base station controller
Base (transmitter) station
Capital asset pricing model
Circuit switch
2Mbit/s unit of capacity
Equi-proportionate mark-up
Frequency Division Duplex
Gateway GPRS serving node
General packet radio system
Global system for mobile communications
GPRS serving node
Home location register
High Speed Packet Access
Indefeasible right to use
Long-run average incremental cost
Long-run incremental cost
Long-Term Evolution
Location update
Modern equivalent asset
Media Gateway
Mobile switching centre
Mobile switching centre server
Mobile virtual network operator
Nordic mobile telephone system
Other licensed operator
Point of interconnect
Packet switch
Release–99
Radio network controller
Subscriber GPRS serving node
Subscriber interface module
Short message service
Synchronous Transfer Mode
Time Division Duplex
Universal Mobile Telecommunications Systems
Visitor location register
Weighted average cost of capital
.